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Most Australian advisers are currently absorbed in altering their business practices to comply with the new FoFA Legislation, and a particularly large issue is deciding on when and how to deliver their Fee Disclosure Statements (we now have a three-letter F word … the FDS!).

We have heard of a number of advisers who are planning to post out all of their FDS’s on the 1st of July, indeed some licensees are even suggesting this is a good option. It may have been suggested in the ASIC regulatory guide, but we think this is a dangerous strategy, and there are far better options that are still compliant with both the wording and the intent of the legislation.

I say dangerous because I think this will result in many of those clients opting out of ongoing services with their adviser, and result in a significant drop in turnover for the advisers’ business. If those clients don’t seek advice elsewhere, this will also likely impact on their financial success.

While this article is a lot longer than our usual posts, it is an important issue to thoroughly consider. Let’s start by a simple consideration of what the FDS obligations are all about, as detailed in the 22 page ASIC Reg Guide 245. I’ll approach this from a business coach’s perspective – not a compliance manager – that is, how can you best manage this new procedure in your business?

Who needs to be issued with a FDS?

All retail clients who are paying fees for ongoing services – the FDS obligation is only triggered if you have replaced – or added to – an in-built trail commission with an Adviser service fee, whether that service fee be a flat fee, an asset-based fee or a hybrid of the two, irrespective of whether you invoice the client directly, or the fee is administered through a product provider. If there is any component of your remuneration that a client can switch off without moving their funds out of the product, it is a fee.

This only relates to ongoing service fees. If you had agreed to an engagement fee, and offered the client payment terms to pay that fee off over a period of time, this does not require an FDS (ie the regular payments have an agreed end date and are for previous services rendered.)

What needs to be disclosed in the FDS?

The FDS needs to disclose the fees that were charged to the client in the previous year (in dollar terms, not a percentage), then clearly state the services that those fees entitled them to, and check off the services that were, in fact, provided.

When does the FDS have to be provided?

The FDS must be provided within 30 days of the anniversary (in other words within 13 months) of the date that the ongoing fee arrangement was entered into.

Note the wording of Disclosure Date is the 12 month anniversary of the most recent fee agreement, and the Due Date is the date 30 days after the Disclosure Date. (just to make matters complicated!)

If it is impossible or unreasonably onerous to identify this date, you can notify existing clients in writing of a nominal disclosure date between 1st July 2013 and 31 January 2014.

How do you need to deliver the FDS?

You have your choice of how to provide the FDS, choosing from:

• face-to-face

• by email, either as an attachment, or with a link to a secure online portal

• by post (if the previous two methods aren’t appropriate)

You can choose whether to deliver your FDS’s one-at-a-time, or send them in groups, either monthly, quarterly or annually.

It’s important to note the motivation behind the Fee Disclosure Statements. They are designed to ensure that clients who are paying for ongoing services “can ascertain whether they are receiving a service from their (adviser) commensurate with the ongoing fees that they are paying.”

When this legislation came out, to be honest, I felt that it was a complete waste of time. If the government were trying to reduce the amount of trail commission paid to advisers in return for delivering no further ongoing services, the FDS rules completely missed the mark because they’re only relevant for clients who have agreed to an explicit fee. To my thinking, all advisers would be openly discussing their ongoing fees and the services they provide already on an annual basis, when they deliver their client reviews, right? In order to commence the fee arrangement in the first place, they would have likely documented the services and fees, and would have been delivering them to clients ever since, right?

Well, in practice this is not always the case. Sadly we know of a number of advisers who were encouraged to switch their clients who currently paid a trail commission, over to the same amount as an asset-based service fee so as to comply with FoFA. Unfortunately, many advisers did this en masse, without re-engaging those clients and linking their fees to valuable service and advice.

There are still many other clients who agreed to a fee arrangement in the past, and yet haven’t actively participated in the advisers’ review service, despite being contacted on numerous occasions and invited in for their review.

In both of these instances, if the adviser chooses to send out their FDS without actively engaging the client first, it can be expected that they will question the relationship. This will likely result in at least a phone call to discuss, and quite possibly, a decision to cancel the service.

We know that many advisers are having difficulty sourcing the detail they require for each of their clients. Rather than simply taking the most ‘efficient’ method , to simply send out a batch of FDS’s on July 1, it would be a wise investment of time and resources, to take a more measured and structured approach to the issue.

How can you implement your FDS’s?

1. Start by identifying which of your clients require an FDS. If you cannot readily access this information using your client database or your accounting software, seek assistance from the product providers who administer the fees for you. Many fund managers are providing reports to licensees and advisers, listing their clients and the income arrangements that are in place, enabling them to identify their clients who require an FDS.

When you have your list of clients, make a note of which clients are engaged with you – ie those you know will be unlikely to have an issue with the information listed in the FDS, vs those who are not as engaged, and might make a judgement call when they receive their FDS.

2. Determine the date on which the FDS is required to be issued for each of those clients. This will likely be 30 days from the date that they either signed their most recent Client Service Agreement (CSA), or the ATP on their latest Statement of Advice (SOA) – if that SOA detailed their ongoing fees and services.

If you don’t record these dates in your client database it may mean that you will need a staff member to trawl through your client files to find the most recent SOA or CSA on file and manually extract the dates.

3. Ensure that you can identify both what services were promised to each client, and which of these were in fact provided.

If this is particularly difficult, you might want to revisit the wording you use when describing your ongoing services, especially in your CSA. You might use explicit wording – “we will meet with you for…”or the slightly different “we will be available to meet with you for…” The latter option shares the responsibility with the client – it’s important that you actively seek to book in your clients for their meeting(s) but if they choose not to meet with you, you have still fulfilled your undertaking.

4. Decide how you would like to deliver your FDS to each client. We’ve included a flowchart of the thought process you might want to follow.

FDS flowchart

For many clients who see value in your services and are fully aware of the fees they pay, receiving an FDS will be a non-event. Nonetheless, if they are going to see you in person within the next twelve months anyway, why would you post out a document they have never seen before, if you will have the opportunity to discuss it with them in person when you next meet?

The clients most at risk of objecting to your FDS are those who have not been in to see you for some time. They may have chosen not to participate in their review meetings with you – or perhaps you have not had effective processes in place or your staff have not been diligent about following your processes, and have not been actively booking in your review meetings.

It may be that you simply do not have the capacity to meet with every client within the next twelve months. We suggest that you identify the clients who can least afford to cancel your services, and actively seek to book them in for a meeting. We find it can be effective when the adviser calls the client personally, and explains the importance of meeting and updating their plan – they often have a better response rate than if their support staff make the call.

It is likely that you have improved the quality of your ongoing review service since they last participated. If you still refer to it as a ‘client review’ rather than something more akin to a ‘Strategic Update Meeting’, you might want to review our article on the subject.

When you meet with the client in person and deliver your brilliantly effective ‘Strategic Update Meeting’,  the client will likely be in the strongest position to see the value of engaging with you effectively. You can use the opportunity to reinforce the need for their participation, and at that point, either suggest a new client service agreement (on a new fee arrangement) OR deliver their FDS. Either way, you then have the greatest potential to maintain them as a client, and most importantly, have a positive impact on their future financial success.

5. Finally, decide upon the content of your FDS’s.

Consider how your FDS’s will be received by your clients. Many licensees will have templates they require their advisers to use, and the FPA has also issued their members with a sample template.

If you do decide that it’s appropriate to send out your FDS’s to some clients via post or email, consider also sending promotional material that will remind your clients of the value of your services.

You may also consider recording a video of you explaining why they are receiving their FDS, personally explaining the value of your service, and encouraging them to take an active part in their ongoing services with you, to enable you to maximise their financial success.

View your FDS through your clients’ eyes. Whilst you may not be required to disclose any commissions you receive for that client, we suggest that if you are providing them with an FDS, you report all of the remuneration you are receiving. You should be providing a valuable service and if you attempt to ‘hide’ some of the rem you receive for that service, the client will likely view this as dishonest, and suspect that there is reason to question the value of your services. Why place yourself in that position?

My final reason why sending out all your FDS’s on July 1 is a bad idea….think of what will happen in future. If you choose the same anniversary date to send your FDS’s to all your clients, remember that the same date will apply next year – unless you enter into a new fee arrangement with them some time over the coming twelve months. In reality, you will likely spread your Strategic Update Meetings throughout the year so that your workflow is consistent.

I have heard some advisers considering to send all their clients an FDS on July 1, just so that they can tick their compliance box, and then when they next see the client over the course of the year, re-set their FDS date. This is just in case any of their clients do not come in in the next year. To my mind, this amounts to overkill. If you are to meet with the client anyway, why create additional work, or reason for your clients to question a communication they have from you? An alternative is to send out the FDS’s for clients whose disclosure date falls in July ONLY IF they have not been booked for a meeting in July, and follow this process on the 1st of each subsequent month.

Another alternative is to set a task for each client, 14 days prior to the due date of their FDS. As each of these dates come due, have a staff member check the client record to see if their FDS date has been revised (part of your review process would be to assign the new date) and if the client has not been in for a meeting, and is not booked to do so, only then send out the FDS. If you use threads and automated workflows, this process becomes more easily manageable. Either way, it spreads the workload over the course of the year.

What if I can’t identify the disclosure date for a bunch of clients?

If this is the case, your best option is to adopt ASIC’s suggested approach in RG245.62. HOWEVER – we strongly advise that you use this only for those clients for whom you really can’t determine a date…don’t cut corners with this or you might find it will backfire on you and result in losing more clients than you should!

Naturally, every business is different – we suggest you use these guidelines when determining your strategy to deliver FDS’s then run it past your compliance manager to ensure that it complies with your licensee’s approach.

Sue Viskovic Headshot

Author, Sue Viskovic.

This post was written by Managing Director of Elixir Consulting, Sue Viskovic. If you’re concerned you may not be connecting with and servicing your clients well enough for them to stay with you after receiving their FDS, perhaps it’s time to seek help from one of our consultants to re-engineer your business model and service offering to regain your peace of mind about the sustainability of your business? Contact Us for a confidential chat.